RPF0318-Casey_Fleming_Interview
00:00:00.000 | ♪ Bless him in the mornings ♪
00:00:03.000 | ♪ Come back Sunday morning ♪
00:00:05.000 | California's top casino and entertainment destination
00:00:08.000 | is now your California to Vegas connection.
00:00:11.000 | Play at Yamava Resort and Casino at San Manuel
00:00:14.000 | to earn points, rewards, and complimentary experiences
00:00:17.000 | for the iconic Palms Casino Resort in Las Vegas.
00:00:21.000 | ♪ Got to sort of tell 'em ♪
00:00:23.000 | Two destinations, one loyalty card.
00:00:26.000 | Visit yamava.com/palms to discover more.
00:00:30.000 | Today on Radical Personal Finance,
00:00:31.000 | we tackle the subject of mortgages.
00:00:35.000 | For many of us, our housing decisions
00:00:38.000 | will be some of the biggest financial transactions
00:00:41.000 | in our lives, and the cost associated
00:00:43.000 | with those housing decisions will be dramatically affected
00:00:47.000 | by our mortgage decisions.
00:00:50.000 | So I'm gonna equip you with some ideas
00:00:53.000 | and tools and tactics and information
00:00:56.000 | on how to get the best possible mortgage.
00:00:59.000 | Conveniently enough, I'm speaking to Casey Fleming,
00:01:02.000 | who's the author of a book called "The Loan Guide,"
00:01:05.000 | "How to Get the Best Possible Mortgage."
00:01:08.000 | (upbeat music)
00:01:24.000 | Welcome to the Radical Personal Finance Podcast,
00:01:26.000 | your personal finance podcast dedicated
00:01:29.000 | to helping you figure out how to live a rich life today
00:01:32.000 | while building and destroying,
00:01:35.000 | in the positive, you know, modern,
00:01:37.000 | like, hey, I'm crushing it sense,
00:01:39.000 | destroying the path to financial freedom
00:01:41.000 | in 10 years or less.
00:01:42.000 | My name is Joshua Sheets.
00:01:43.000 | I'm your host, your guide,
00:01:46.000 | and your fellow journeyman on this path.
00:01:49.000 | (upbeat music)
00:01:51.000 | (siren blaring)
00:01:54.000 | I don't know about you, but, you know,
00:01:59.000 | when I first got my first mortgage,
00:02:01.000 | I've only ever had one so far in my life,
00:02:03.000 | and I don't have it anymore,
00:02:04.000 | but when I first got my first mortgage,
00:02:06.000 | I thought I was pretty smart.
00:02:07.000 | I thought I had, you know,
00:02:09.000 | I thought I knew what I was doing,
00:02:10.000 | because after all, I was just gonna go out
00:02:12.000 | and get a 30-year mortgage at a fixed rate interest, right?
00:02:15.000 | So it's simple, and I considered getting
00:02:17.000 | a 15-year mortgage or a 30-year mortgage,
00:02:19.000 | and I decided to get a 30-year mortgage.
00:02:20.000 | I knew that you should never do anything
00:02:22.000 | except get a fixed-rate mortgage.
00:02:24.000 | I knew that you should only get a 15 or 30-year mortgage,
00:02:27.000 | and I didn't want a 15.
00:02:28.000 | I got a 30, and I knew that you should put
00:02:32.000 | at least 20% down, and I knew that I was
00:02:34.000 | making the right decisions.
00:02:36.000 | (laughs)
00:02:37.000 | In retrospect, I'll tell you what.
00:02:39.000 | I don't think I knew nearly what I wish I had known,
00:02:43.000 | and in hindsight, I wish I had done some more study
00:02:46.000 | and preparation for that decision.
00:02:48.000 | Now, I've tried to make up for lost time
00:02:50.000 | and mend the error of my ways with some additional study,
00:02:53.000 | and today's show is part of that.
00:02:55.000 | My guest is Casey Fleming, who is the author
00:02:57.000 | of "The Loan Guide," how to get the best possible mortgage,
00:03:00.000 | which is an excellent book on the subject.
00:03:02.000 | If you're gonna buy a house, I recommend you probably.
00:03:03.000 | This is a good one for you to read.
00:03:05.000 | And we're gonna try to chart the path for you a little bit
00:03:08.000 | and help you with some knowledge and wisdom
00:03:11.000 | and insight to make your next mortgage
00:03:15.000 | a little bit better.
00:03:17.000 | Casey, welcome to Radical Personal Finance.
00:03:19.000 | - Well, thank you very much, and thank you for having me.
00:03:22.000 | - For sure.
00:03:23.000 | So we connected at FinCon 2015 in Charlotte,
00:03:26.000 | and you gave me a copy of your book,
00:03:28.000 | and we had breakfast together, and I was so impressed
00:03:30.000 | with what you talked about that I said,
00:03:32.000 | "Let's have you on the show, and let's talk about mortgages."
00:03:34.000 | And what I'd like to do quickly before we get started
00:03:38.000 | is give a quick background.
00:03:40.000 | What's your background in the mortgage industry?
00:03:42.000 | - I started off as an appraiser.
00:03:46.000 | And founded a company and built it to one of the largest
00:03:50.000 | appraisal and consulting firms in the San Francisco Bay Area
00:03:54.000 | back in the '80s.
00:03:56.000 | And then in the mid-'90s, I transitioned over into lending.
00:03:59.000 | So I've been lending now for a little over 20 years.
00:04:02.000 | - So why did you write a book on lending?
00:04:07.000 | 'Cause your book is called "The Loan Guide--
00:04:09.000 | How to Get the Best Possible Mortgage,"
00:04:10.000 | which is the focus of our conversation.
00:04:12.000 | What led to creating the book?
00:04:14.000 | - Well, some folks have asked me if it was a labor of love,
00:04:17.000 | and actually I answered that no, it was a labor of being
00:04:21.000 | really ticked off.
00:04:22.000 | And what I mean by that is everything that led up to the crash
00:04:26.000 | was a lot of really bad lending practices
00:04:31.000 | on the part of players throughout the entire industry.
00:04:34.000 | And it was very frustrating as someone who is very involved
00:04:39.000 | in our professional organizations, and I know a lot of really good,
00:04:42.000 | ethical, professional loan officers,
00:04:46.000 | watching the bad apples ruin everything by essentially
00:04:53.000 | taking advantage of the consumers was really maddening.
00:04:57.000 | And obviously we all know how bad the results were.
00:05:02.000 | We all know who all got hurt.
00:05:04.000 | So the purpose of the book was really to empower consumers
00:05:10.000 | to educate themselves so that they can make wise choices
00:05:14.000 | regardless of whether or not they're getting good advice
00:05:17.000 | from their particular mortgage advisor.
00:05:20.000 | - I think it's a good job, and it's one of the best books
00:05:23.000 | on mortgage--I mean, just the mortgage process that I have read.
00:05:28.000 | I want to read a quote from "The Forward"
00:05:30.000 | to establish the context for our conversation.
00:05:33.000 | You wrote this, "Nothing in this book is terribly exciting or sexy.
00:05:37.000 | Reading about mortgages won't keep you up at night.
00:05:39.000 | You'll be going through pages excitedly,
00:05:41.000 | wondering how it will all turn out.
00:05:43.000 | If I had my druthers, I'd rather be reading a tabloid.
00:05:45.000 | Yet a mortgage is almost certainly the largest debt you will ever have.
00:05:49.000 | There are some sobering implications to this.
00:05:51.000 | You will probably spend more money on your mortgages over your lifetime
00:05:55.000 | than you will on anything else.
00:05:57.000 | I repeat, you will spend more money on your mortgages over your lifetime
00:06:01.000 | than you will on anything else.
00:06:04.000 | More of your working hours will be spent earning money
00:06:06.000 | to pay your mortgage than any other debt.
00:06:08.000 | Families that manage their mortgage portfolio properly
00:06:11.000 | can have tens of thousands, if not hundreds of thousands,
00:06:14.000 | more in assets when they retire than those who don't."
00:06:17.000 | In case you thought that was a great quote
00:06:19.000 | because it sets the context for how important the discussion is,
00:06:21.000 | no, it's not exciting or sexy, but it is important.
00:06:25.000 | Yet so many of us wander into getting a mortgage
00:06:29.000 | and we know nothing about it, nothing about our options.
00:06:32.000 | What are the biggest--let me say maybe the two or three biggest mistakes
00:06:36.000 | that you see borrowers make when it comes to getting a mortgage?
00:06:41.000 | Well, I think probably the first thing is not shopping hard enough.
00:06:49.000 | They'll go off and they'll shop online and they'll end up being drawn in
00:06:55.000 | by some great advertising, some great marketing.
00:07:00.000 | And there's a lot of money in the mortgage industry,
00:07:03.000 | so there's some pretty refined marketing that's very, very well done.
00:07:08.000 | And it's pretty easy to draw someone into something
00:07:10.000 | that isn't necessarily the best thing that they should do for themselves.
00:07:15.000 | The other thing that folks do, I think, is they walk in
00:07:18.000 | with a preconceived notion as to what they want.
00:07:21.000 | And I hear these strange rules of thumb all the time.
00:07:26.000 | You should never pay points or you should never pay any costs
00:07:29.000 | or you should always get a 30-year fixed mortgage.
00:07:32.000 | And the problem is, of course, is if you do that,
00:07:34.000 | it really limits your ability to structure a mortgage in a way
00:07:38.000 | that gives you the lowest possible lifetime cost
00:07:41.000 | for your specific profile and goals and needs.
00:07:48.000 | Can you give some examples of perhaps cases that you've worked on
00:07:52.000 | where by laying aside the preconceived ideas
00:07:56.000 | and just considering the market at the time of purchase,
00:08:00.000 | the borrower was able to get a better deal?
00:08:03.000 | Oh, sure. I work with a lot of Silicon Valley engineers,
00:08:06.000 | so they do tend to walk in with a lot of preconceived notions
00:08:11.000 | because they've done a lot of research.
00:08:14.000 | So one of the most common is you should never pay any points.
00:08:17.000 | And what I do is we earn the exact same amount,
00:08:22.000 | no matter what you choose to do, whether you pay points or not pay points.
00:08:26.000 | And--pardon me.
00:08:29.000 | So we're going to earn the same amount no matter what you do.
00:08:33.000 | So what I do is I give people options to pay points if they want to,
00:08:37.000 | and then I show them how much the various options are going to cost over time.
00:08:43.000 | And probably 75%, 80% of the time, engineers who walk in and say,
00:08:50.000 | "I don't want to pay any points," will take a look at what it's really going to cost them
00:08:53.000 | over whatever they believe their holding period is going to be, say, 7 years or so.
00:08:58.000 | They'll look at the total cost over that holding period,
00:09:01.000 | and they will decide to go ahead and pay money to buy down the interest rate by paying points.
00:09:07.000 | So they walk in with one notion as to what they think is the best way to go,
00:09:11.000 | and they walk out doing something totally different.
00:09:14.000 | So why does that work? Why is that option available?
00:09:19.000 | And why would the bank offer that to them to allow them--explain what buying points are
00:09:25.000 | and why the bank allows that such that it reduces the costs?
00:09:29.000 | So it's actually pretty simple.
00:09:32.000 | The bank doesn't keep the loan. They sell the loan off.
00:09:37.000 | And there's a price in the industry we call it par, where if a bank sells a loan off,
00:09:44.000 | it's going to be fairly neutral for them.
00:09:47.000 | And on a typical loan, the lender is going to earn typically somewhere in the vicinity of about 3%
00:09:55.000 | of the loan amount when they sell the loan off.
00:09:59.000 | So what happens is that if the interest rate is higher than that,
00:10:06.000 | then the buyer of the mortgage will pay more for that mortgage.
00:10:10.000 | And if the interest rate is lower than that, the buyer will pay less for that mortgage.
00:10:14.000 | So the bottom line of this is that if the lender has--if you accept a higher interest rate,
00:10:22.000 | the lender's going to receive more profit on that.
00:10:25.000 | And what they can do is they can use some of that profit to credit you for closing costs,
00:10:29.000 | points, origination fee, even title and escrow fees.
00:10:33.000 | If you want to earn--if you want to pay less in interest,
00:10:37.000 | then the bank can simply earn their profit by charging you points
00:10:41.000 | and then sell the loan off at--because it's a lower interest rate--
00:10:46.000 | at whatever price the buyer is willing to pay for that loan.
00:10:50.000 | Describe a scenario where somebody made a choice other than a 30-year fixed
00:10:55.000 | and perhaps it was a better financial choice for them and why.
00:11:00.000 | So there's--on adjustable-rate mortgages, you have the option of different fixed periods initially.
00:11:09.000 | So it could be a 5-year fixed or a 3-year fixed or a 7-year fixed,
00:11:13.000 | where that initial period, it's fixed for that period of time.
00:11:17.000 | So many folks, if they are pretty confident that they're only going to be in that home
00:11:21.000 | for 5 years or 7 years, may choose to have a 7-year fixed.
00:11:27.000 | And if they save, let's say, half a percent over the course of the first 7 years,
00:11:33.000 | what they've done is they've saved thousands of money,
00:11:36.000 | knowing--thousands of dollars of money--knowing that they're going to end up
00:11:42.000 | selling the property before it turns into an adjustable-rate mortgage anyway.
00:11:47.000 | It's quite common in Silicon Valley because most of the engineers and high-tech folks
00:11:54.000 | that work here end up with fairly large occasional windfall income from RSUs
00:12:00.000 | or stock options or even bonuses.
00:12:03.000 | And I've had quite a few clients who came in and said,
00:12:06.000 | "My intention is to actually pay this loan off in 7 years."
00:12:10.000 | And because the adjustable-rate mortgage offers a lower interest rate,
00:12:14.000 | they can pay it off faster and cheaper if they're fairly confident
00:12:18.000 | they're going to be able to pay it off in only 7 years.
00:12:22.000 | The fear with adjustable-rate mortgages is the potential for the mortgage
00:12:26.000 | to adjust to crazy levels.
00:12:29.000 | And this is the approach, say, "Well, wait a second.
00:12:32.000 | If I get an adjustable-rate mortgage and interest rates go up by 3%,
00:12:35.000 | all of a sudden my payment is going to be through the roof."
00:12:39.000 | How do you actually analyze an adjustable-rate mortgage to figure out
00:12:43.000 | if that's the case or if there is a margin of safety?
00:12:48.000 | Great question.
00:12:50.000 | It's very important to understand the terms of your adjustable-rate mortgage
00:12:57.000 | before you accept one.
00:13:00.000 | The most important terms to remember are the index,
00:13:05.000 | and this is going to be defined in your actual contract.
00:13:08.000 | An index is just simply a measurement of interest rates.
00:13:11.000 | What they'll do is they'll say, "We're going to base--
00:13:13.000 | when we do adjust your interest rate, we're going to base it based on this index."
00:13:19.000 | The most common index, and it's one probably most folks have heard of,
00:13:22.000 | is LIBOR.
00:13:26.000 | That's just simply a measure of where interest rates are at any given point in time,
00:13:30.000 | just like the Dow Jones Industrial Average is a measure of where stocks might be
00:13:33.000 | at any point in time.
00:13:36.000 | Then in your contract, they're also going to define the margin.
00:13:39.000 | Now, a typical margin on a LIBOR loan is going to be between 2.25 to 2.75.
00:13:46.000 | So you want to look at that margin, and what it says is when we adjust,
00:13:52.000 | we're going to take whatever the current value of the index is,
00:13:54.000 | and we're going to add the margin.
00:13:56.000 | So if the index, let's just say, is 1% and your margin is 2.25%,
00:14:02.000 | your new interest rate will be 3.25%.
00:14:06.000 | The reason that this becomes important is today LIBOR is running under 1%.
00:14:14.000 | So folks who have an adjustable-rate mortgage that is adjusting today
00:14:18.000 | are finding that their loan is adjusting out to lower than where fixed-rate loans are,
00:14:26.000 | so it's not exploding at all.
00:14:29.000 | The other elements that you really need to understand are your caps,
00:14:33.000 | which is the cap on how high the interest rate can go,
00:14:37.000 | and there's three caps that are really important.
00:14:40.000 | There's an initial rate cap.
00:14:42.000 | So if you have, let's say, a 5-1 arm that's fixed for five years,
00:14:46.000 | at the end of five years, then your loan can be adjusted a maximum of either 2%
00:14:53.000 | or what's more common now, 5%.
00:14:56.000 | Then you have an annual adjustment, and that's always 2%.
00:15:02.000 | And then you have a lifetime cap, which is today in most cases 5% over the start rate.
00:15:10.000 | So it's really important to understand those five terms whenever you're looking at
00:15:17.000 | an adjustable-rate mortgage.
00:15:18.000 | If you're comparing offers, for instance, you should be asking all five of those questions
00:15:24.000 | and understand exactly how it's going to adjust.
00:15:27.000 | I had a family member recently, as in the last few days, who's saying,
00:15:31.000 | "Okay, I need to refinance my house, and where do I go?
00:15:35.000 | Who do I start with?"
00:15:36.000 | How would you advise somebody who is looking at their house saying,
00:15:39.000 | "I'd like to refinance," and trying to figure out how to approach finding somebody
00:15:45.000 | to work with?
00:15:46.000 | How would you advise someone in that situation?
00:15:51.000 | I think the best way to do it is to start online just so that you educate yourself
00:15:55.000 | a little bit and understand where the various products are.
00:16:02.000 | And then really write down, figure out what your real goal is in refinancing
00:16:07.000 | because there's a lot of different reasons to refinance.
00:16:10.000 | And when you actually go speak to someone--I'm a brick-and-mortar guy.
00:16:15.000 | I prefer working with somebody that I can meet face-to-face and look them in the eye,
00:16:21.000 | and that way I get a feel for whether or not they're being honest and ethical.
00:16:28.000 | So I would educate--as a consumer, I would educate myself first, figure out why I want
00:16:35.000 | to refinance, and then find somebody local, somebody who's referred by a family member
00:16:40.000 | or a friend that you trust would be ideal, and ask them sharp questions.
00:16:47.000 | You have the right to ask a lot of questions about why they're recommending
00:16:53.000 | whatever they're recommending and about whether or not it's really going to be
00:17:01.000 | beneficial for you.
00:17:03.000 | Is there a way to know which is the cheaper option, working with a bank,
00:17:06.000 | working with a broker?
00:17:08.000 | How do you deal with that situation?
00:17:11.000 | A lot of it depends on the circumstances.
00:17:16.000 | Generally, we all get our money from the same pool.
00:17:19.000 | Ninety percent, roughly, of all loans made today are sold to Fannie Mae, Freddie Mac.
00:17:25.000 | At any given day and in any given moment of time, Freddie Mac and Fannie Mae
00:17:33.000 | actually advertise what they're willing to pay for loans that are going to be
00:17:36.000 | delivered 60 days from now.
00:17:38.000 | So the differences between most lenders are fairly small.
00:17:43.000 | The reason there are some differences is some lenders strategically go for the
00:17:49.000 | lowest possible cost.
00:17:51.000 | Some lenders go for offering the best service.
00:17:54.000 | And also, if a lender has been slow over the course of the month, then oftentimes
00:18:02.000 | they will narrow their margin a little bit just to fill their pipeline a little bit.
00:18:05.000 | So it's worth shopping.
00:18:08.000 | In my experience, brokers have a lower overhead cost and can usually do a better
00:18:16.000 | job, especially on conforming loans that are sold to Fannie Mae, Freddie Mac,
00:18:23.000 | which would be loans under $417,000 to prime borrowers.
00:18:27.000 | Usually, a broker can give you a better deal, but I still think it's worth
00:18:30.000 | shopping and comparing.
00:18:33.000 | It's a challenge.
00:18:36.000 | I know even here in my local market, when I took out a mortgage on the house that
00:18:39.000 | I bought, looking back at it, the process went fine, but I never was confident
00:18:44.000 | that the lender knew all the little tricks.
00:18:47.000 | And what was the biggest frustration for me was I found out six months after I
00:18:52.000 | bought the house about the Florida Mortgage Credit Certificate Program.
00:18:56.000 | And I found out that the house that I purchased and the terms, I would have
00:19:01.000 | qualified for the Mortgage Credit Certificate Program, which was a bonus tax
00:19:04.000 | credit on top of all of the normal tax deductions that people are aware of.
00:19:09.000 | And it was free money that if somebody had just told me about it, I could have
00:19:13.000 | gotten and it would have been several thousand dollars a year, but except I had
00:19:16.000 | to do it in advance.
00:19:19.000 | And I just remember being so frustrated with the fact that the broker didn't
00:19:24.000 | tell me about it, the real estate agent didn't tell me about it, the broker
00:19:27.000 | didn't tell me about it.
00:19:28.000 | I was just incredibly frustrated and I was like, "Do you guys not do your job?"
00:19:31.000 | And even just in terms of the options, I never found a broker who was willing to
00:19:35.000 | sit down and say, "Let me talk you through the options."
00:19:38.000 | Rather, what happened was, "Well, here's a standard 30-rate fix and here are
00:19:41.000 | the three companies," and boom.
00:19:43.000 | And I was looking for more of someone to say, "Let's look through your situation
00:19:46.000 | and look at the options."
00:19:47.000 | Nobody presented to me a few different adjustable-rate mortgage options and
00:19:51.000 | explained to me, "Here are the risks and here are the advantages and here's the
00:19:54.000 | price over the holding period."
00:19:56.000 | I found it to be a very frustrating experience and I've not known how to
00:19:59.000 | advise people to get a better experience.
00:20:04.000 | Well, and that's a good question.
00:20:06.000 | I think as a consumer, what you have to do is you have to be ready, willing, and
00:20:11.000 | able to shop and talk to different people until you find somebody that you're
00:20:14.000 | pretty confident will do that.
00:20:16.000 | One of the tricks about going to the real estate agent, if you're purchasing a
00:20:22.000 | home and your real estate agent is steering you towards a particular lender,
00:20:26.000 | which is very, very common, we work as partners with real estate agents.
00:20:32.000 | One of the challenges to that is that it's in everyone's interest except yours to
00:20:39.000 | make the deal as smooth and effortless as possible because that gets us to
00:20:45.000 | close faster so everybody gets paid sooner and more reliably because the longer
00:20:51.000 | a deal is in escrow, the more chances there are for it to fall apart for any
00:20:56.000 | reason, for some reason.
00:20:58.000 | So what you're going to find is complicated elements like the mortgage credit
00:21:05.000 | certificate program are rarely brought up at that point in the process because,
00:21:13.000 | quite frankly, it adds a lot of complexity and a lot of time to the process of
00:21:19.000 | getting your loan approved and through the system.
00:21:22.000 | So my advice is if you educate yourself and understand that you have the right to
00:21:29.000 | understand a bunch of different options, then find somebody who's willing to
00:21:34.000 | present you with at least three different options.
00:21:36.000 | - Right.
00:21:38.000 | Yeah, as with anything, I can't blame other people for my lack of homework.
00:21:42.000 | It's just I wasn't aware of it.
00:21:44.000 | But it definitely – it just seems like in so many industries, I'm sure in the
00:21:48.000 | service industry too, it should be pretty easy to stand out.
00:21:52.000 | But you got to bring value.
00:21:57.000 | So let's talk about types of loans.
00:21:59.000 | I'd like you to give just an overview, a few minutes of discussion of each of the
00:22:03.000 | types of loans and thinking about what to do and how to approach it.
00:22:09.000 | I want to start with the one that's abnormal but I get a lot of questions about
00:22:13.000 | reverse mortgages.
00:22:14.000 | Explain what a reverse mortgage is and how to approach the decision of whether or
00:22:18.000 | not you should take one out.
00:22:22.000 | - Okay.
00:22:23.000 | A reverse mortgage is simply a mortgage where you do not have to make the
00:22:29.000 | mortgage payments.
00:22:30.000 | The interest on the loan accrues and simply eats into your equity on the
00:22:36.000 | property.
00:22:37.000 | So it's for older folks who do not have enough income to live.
00:22:44.000 | And there's four different ways that a reverse mortgage can be structured.
00:22:50.000 | And very briefly, one is just simply a lump sum payment.
00:22:54.000 | And that's an ideal situation for someone who has a relatively large mortgage.
00:23:00.000 | They're having difficulty making the payment.
00:23:02.000 | They can get a one-time lump sum reverse mortgage which pays that off.
00:23:09.000 | And then from then on, they simply have no mortgage payments at all.
00:23:13.000 | There's also one where you get payments for your lifetime.
00:23:18.000 | So you get monthly payments for as long as you live.
00:23:21.000 | That's ideal for someone who has a little bit more equity in their property and
00:23:26.000 | needs basically supplemental monthly income in order to be able to just live
00:23:34.000 | life normally and have a nice life.
00:23:37.000 | The third is set up as an equity line.
00:23:41.000 | And the equity line is perfect for folks that are okay on a monthly basis but
00:23:46.000 | have occasional needs.
00:23:49.000 | And a good example is a couple that I worked with where the husband had a
00:23:56.000 | stroke.
00:23:57.000 | So all of a sudden, they had some large medical bills.
00:23:59.000 | And they were fine except for that.
00:24:02.000 | So they used an equity line but they ran it all the way up to the limit and
00:24:06.000 | they were not qualified to increase that limit.
00:24:08.000 | And they were looking at large medical bills that they simply couldn't pay
00:24:12.000 | but a tremendous amount of equity in their home.
00:24:15.000 | So we set up a reverse mortgage to pay off the equity line and then give them
00:24:19.000 | -- to pay off the existing equity line and then give them another equity line
00:24:24.000 | or let's just say it's all one loan but they had enough room to be able to draw
00:24:29.000 | off money whenever they needed it for medical expenses.
00:24:33.000 | And they would never have to make a payment for the rest of their life.
00:24:36.000 | So it allowed them to stay in the home for as long as they wanted.
00:24:40.000 | So the point here and I flipped it just in hopes of keeping the conversation
00:24:45.000 | interesting but I may have made it more confusing.
00:24:47.000 | The point of a reverse mortgage is to take equity that you own out of a house
00:24:51.000 | and basically give it away to the bank in exchange for money now in one of those
00:24:55.000 | forms.
00:24:56.000 | So this is the exact opposite of a mainstream mortgage.
00:25:02.000 | You see the value but you also see some dangers.
00:25:06.000 | So what would be -- what are some reasons why people would choose not to get a
00:25:10.000 | reverse mortgage?
00:25:13.000 | Well, it is the most expensive mortgage available and that's because virtually
00:25:21.000 | all reverse mortgages today are FHA insured and that FHA insurance is fairly
00:25:29.000 | expensive.
00:25:30.000 | So the rest of the costs are more or less the same as a forward mortgage or
00:25:37.000 | conventional mortgage.
00:25:39.000 | But on the reverse mortgage, what we find is that you have -- it's a very,
00:25:45.000 | very high cost mortgage.
00:25:47.000 | The second thing is it does eat up your equity.
00:25:49.000 | So if you have concerns about that, if you have children that you want to leave
00:25:52.000 | your property to, you'll have less equity when you're ready to leave that to
00:25:59.000 | your children than you would if you didn't do the reverse mortgage.
00:26:03.000 | Reverse mortgages today are designed so that it would be virtually impossible to
00:26:09.000 | eat up 100% of your equity but not completely impossible.
00:26:14.000 | So there is some risk there as well.
00:26:17.000 | And then finally, the last bit is the -- the last thing that's important is that
00:26:23.000 | the reverse mortgage is still the one product that the -- where the lender can
00:26:30.000 | actually earn more money by selling you a higher interest rate.
00:26:35.000 | On all other products, especially for brokers, we're unable to increase our
00:26:42.000 | revenue in any way.
00:26:44.000 | We have to make the exact same amount on everything.
00:26:47.000 | That rule doesn't apply to banks and mortgage bankers, large mortgage
00:26:52.000 | bankers, but it applies to brokers.
00:26:54.000 | With reverse mortgages, you can actually earn huge incomes by selling a very
00:27:00.000 | high interest rate.
00:27:02.000 | And because the consumer doesn't make any payments, often they don't actually
00:27:06.000 | care or they don't know that they care.
00:27:09.000 | So it's sort of a little trap that's important to understand so that you can
00:27:14.000 | avoid it if you're actually shopping for a reverse mortgage.
00:27:18.000 | - Are the costs of mortgages declining, meaning as they've become more popular,
00:27:24.000 | is the cost of insurance declining and is the cost of taking out the mortgage
00:27:28.000 | declining at all?
00:27:30.000 | - In terms of the reverse mortgage?
00:27:32.000 | - Yes.
00:27:33.000 | - Yes.
00:27:34.000 | The upfront cost of a reverse mortgage declined this year.
00:27:39.000 | FHA sets the insurance premium and it declined this year.
00:27:43.000 | And now it's down, your upfront premium is down to one-half of 1% of the value
00:27:52.000 | of your home.
00:27:53.000 | And it was at one point as much as 2.5%.
00:27:56.000 | So in virtually all cases, there's some exceptions, but in virtually all cases
00:28:01.000 | today, the upfront insurance is actually considerably less than what it used to be.
00:28:08.000 | - That's what has confused me about the reverse mortgage market, and I'm not in
00:28:12.000 | it every day, but it just seems to me that it's a useful tool and you've got to
00:28:16.000 | analyze it each time, but the prices shouldn't remain high forever.
00:28:20.000 | Like there should be competition and there should be reasons why the prices
00:28:23.000 | would be declining.
00:28:24.000 | So yes, when it was a newer product, I could understand why the costs would be
00:28:28.000 | high, but I'd like to see it coming down and being possible.
00:28:33.000 | I want to transition.
00:28:34.000 | I want to describe a scenario and you can tell me what's available in the market
00:28:37.000 | today.
00:28:38.000 | And this is the thing I've kind of puzzled over.
00:28:40.000 | But in my ideal world, if I were a traditional retiree, say 65-ish, whatever,
00:28:48.000 | I would, and assuming most people today, the concept of the family house that the
00:28:53.000 | kids want to inherit is for most people dead and gone.
00:28:57.000 | Maybe that was the case when you had the family farmstead and your kids were going
00:29:00.000 | to take over.
00:29:01.000 | But today, most of us, the houses we live in are a commodity.
00:29:04.000 | They're nice, but it's not like we're going to pass them on through the
00:29:07.000 | generations.
00:29:08.000 | So most of the time, if I die and leave behind a house to my 45-year-old kids,
00:29:14.000 | they just got to go through the hassle of selling it and getting rid of it.
00:29:19.000 | And they just got to deal with that and then they split up the money.
00:29:22.000 | So in some ways, my ideal scenario if I were a retiree would be to have either a
00:29:28.000 | rental house, which is less than normal because of the risks there.
00:29:34.000 | Most retirees aren't willing to face the prospect of a landlord adjusting things
00:29:37.000 | on them.
00:29:38.000 | But I'd like to have either a maximum interest only mortgage or some way set up
00:29:43.000 | with maybe a reverse mortgage where I don't own the property.
00:29:46.000 | I just simply live in the property and I have a maximum mortgage on it possible so
00:29:53.000 | that my assets are somewhere else that's a little bit easier to deal with than a
00:29:56.000 | personal house, but minimum payments possible and to do that for the longest
00:30:00.000 | period possible.
00:30:03.000 | If you get the scenario, what would be the best way to set that up if I were going
00:30:06.000 | to try to accomplish that?
00:30:08.000 | Would it be through using a reverse mortgage product?
00:30:10.000 | Would it be through an interest only loan of some kind?
00:30:12.000 | How would I set that up in today, 2015, 2016?
00:30:16.000 | Just to clarify, so one of your goals is to not make payments or just you don't
00:30:22.000 | really care whether you're leaving equity or not?
00:30:25.000 | I have enough money.
00:30:26.000 | I don't care about equity.
00:30:27.000 | I want to strip the equity out of the house.
00:30:29.000 | So $300,000 house, I want the maximum equity out of the house.
00:30:32.000 | And I'm willing to make payments, but I don't want to make principal payments if
00:30:35.000 | possible.
00:30:36.000 | I want to make minimum payments.
00:30:38.000 | It's not a problem to make some payments, but I want to make either minimum
00:30:41.000 | payments or no payments.
00:30:44.000 | Well, an interest only loan would be significantly cheaper.
00:30:47.000 | As a matter of fact, an equity line would actually be, by far and away, the least
00:30:51.000 | expensive way to do that.
00:30:54.000 | And with an equity line, you can certainly get -- with a conventional equity line,
00:30:57.000 | you can get significantly more money out of your property than you could with a
00:31:04.000 | reverse mortgage.
00:31:07.000 | So -- oh, go ahead.
00:31:10.000 | No, so then I would take the maximum equity line out and just pay the interest
00:31:13.000 | payments on that line on an ongoing basis?
00:31:16.000 | Is that what you're saying?
00:31:17.000 | Yes.
00:31:18.000 | And the only caveat to that would be that within 10 years, usually exactly 10
00:31:26.000 | years, the equity line draw period will be over.
00:31:30.000 | And so you'll have to change your strategy at that point.
00:31:34.000 | And possibly you could refinance if you still qualify.
00:31:38.000 | You could just roll it into a new equity line.
00:31:41.000 | Or at that point, you could go out and get a reverse mortgage, too.
00:31:45.000 | Interesting.
00:31:47.000 | And could -- in an equity line, can they lower -- I guess it would depend on the
00:31:52.000 | terms of the contract, but wouldn't it be normal that they could lower the amount
00:31:55.000 | of the line and forced repayment of some kind?
00:31:58.000 | They can.
00:32:00.000 | But historically, the only time that's happened is when we saw large declines in
00:32:04.000 | the value of the homes back in 2008, 2009.
00:32:08.000 | Okay.
00:32:11.000 | Because I know that's something that I did see happen with some clients.
00:32:14.000 | I was just asking you because you're a creative thinker and it's a scenario
00:32:18.000 | that I've changed my tune on.
00:32:20.000 | And the basic scenario has been this.
00:32:22.000 | I used to think that the goal for a retiree would be to have a paid off home
00:32:27.000 | mortgage, that this is the ideal scenario, have a paid off home mortgage and then
00:32:31.000 | eliminate the risk.
00:32:33.000 | But what I've realized is when you're living off of the investment income from a
00:32:36.000 | portfolio, you don't have the same risk that somebody who's living off of the
00:32:40.000 | income from wages has.
00:32:42.000 | So for me, I'm 30 years old, it would be very valuable to have a paid for house.
00:32:46.000 | And I'm not saying that if I had abundant other money that at 65, if I had a paid
00:32:51.000 | off house from 30 to 65 that I'd go borrow money on it.
00:32:54.000 | I might not.
00:32:56.000 | But I would consider it because if I'm living on a portfolio of income, then by
00:32:59.000 | definition I have income and I no longer have -- the mortgage is just a cost of
00:33:03.000 | financing.
00:33:05.000 | And houses are really clumsy as far as passing along generationally.
00:33:08.000 | And so I've looked for strategies to say, "What's the best way to cut the cost
00:33:13.000 | down on this thing?"
00:33:15.000 | So I've really looked for ways to do that.
00:33:17.000 | So that was the scenario.
00:33:19.000 | Walk through some of the different options.
00:33:21.000 | So in your book, you talk about fixed rate mortgages, adjustable rate mortgages,
00:33:25.000 | interest only loans, option arms, private money, second mortgages, and equity
00:33:29.000 | lines.
00:33:30.000 | Let's walk through those options.
00:33:32.000 | And if you were approaching it, what are the pros and cons that an individual
00:33:35.000 | borrower would need to understand when thinking through their decisions?
00:33:39.000 | So what I like to do is I like to start off with finding out what a borrower's
00:33:48.000 | goals are.
00:33:49.000 | Most borrowers will say their goal is to have the lowest interest rate possible.
00:33:53.000 | But that doesn't really tell me a lot.
00:33:56.000 | What I need to know and what they need to know is, you know, are you looking for
00:34:01.000 | the lowest monthly payment, the lowest upfront cost, the lowest lifetime cost,
00:34:05.000 | or do you want to pay it off as fast as possible, or something else.
00:34:09.000 | But it's usually one of those four things that becomes most important to them.
00:34:12.000 | So that's the first thing I look at.
00:34:14.000 | With a 30-year fixed mortgage, obviously the greatest advantage is the interest
00:34:20.000 | rate's never going to change, your payment's never going to change.
00:34:22.000 | It's a very secure mortgage.
00:34:24.000 | But it is the most expensive mortgage out there, unless in the future interest
00:34:30.000 | rates just go through the roof.
00:34:33.000 | And given the fact that in the last 20 years they've been extremely low,
00:34:38.000 | maybe the odds of them going through the roof are not that high.
00:34:43.000 | The adjustable-rate mortgages we've kind of already touched on,
00:34:46.000 | the greatest advantage to them is they're significantly less expensive,
00:34:51.000 | at least for the fixed period.
00:34:53.000 | And as it turns out, over the last 10 years they've been significantly
00:34:58.000 | cheaper even after they begin adjusting, as long as it's not one of the
00:35:02.000 | toxic adjustable-rate mortgages.
00:35:06.000 | Option arms are no longer an option today.
00:35:09.000 | There was actually nothing wrong with the product.
00:35:11.000 | Unfortunately, they were sold improperly to people that shouldn't have had them.
00:35:15.000 | And so those are considered toxic loan products today,
00:35:19.000 | and they're not available, so that's kind of off the table.
00:35:22.000 | And then private money is very expensive.
00:35:24.000 | You would only use that if you can't qualify in any other way.
00:35:30.000 | But I think for each person individually what they have to figure out is what
00:35:34.000 | really is their goal.
00:35:35.000 | And then I do take a look at their income and spending profile.
00:35:40.000 | If somebody has abundant disposable income, for instance,
00:35:47.000 | some folks are really conservative and instead of spending 40% of their gross
00:35:52.000 | income on housing debt, they only want to spend 30% or something.
00:35:59.000 | Or if they have large bonuses or stock options, RSUs,
00:36:03.000 | somebody with those kinds of income profiles usually have a higher risk
00:36:09.000 | tolerance, so doing something like an interest-only adjustable-rate mortgage
00:36:15.000 | could be a really good option for them.
00:36:18.000 | If someone has really thin disposable income,
00:36:21.000 | like they're really stretching out their qualifying and they're qualifying for
00:36:26.000 | as much house as they can possibly buy, or if they have bad spending habits,
00:36:31.000 | they've got a lot of credit card debt,
00:36:33.000 | that tells me that they're likely to continue spending and they could get into
00:36:36.000 | trouble.
00:36:37.000 | Or if they have uncertain employment.
00:36:39.000 | I mean, here in Silicon Valley we have a lot of layoffs,
00:36:41.000 | and certain companies are more prone to it than others, for instance.
00:36:46.000 | Well, if someone has those elements in their income and spending profile,
00:36:51.000 | I would say they'd have a lower risk tolerance and I would be more inclined to
00:36:56.000 | recommend a fixed-rate loan for someone like that.
00:36:59.000 | You work in an interesting mortgage environment.
00:37:05.000 | I mean, again, Silicon Valley.
00:37:07.000 | So you're not dealing with somebody in the Midwest who's taken out a $75,000
00:37:12.000 | mortgage.
00:37:13.000 | You're more likely to be working with a $750,000 mortgage.
00:37:16.000 | How does that affect the mortgage decision process?
00:37:20.000 | Well, the bigger the mortgage, the bigger the risk/reward equation becomes.
00:37:28.000 | So it's a great point if someone's got a $75,000 mortgage in the Midwest,
00:37:34.000 | their savings potential from getting an adjustable-rate mortgage is really
00:37:41.000 | very small, as is the risk if it begins to adjust.
00:37:46.000 | With a $750,000 loan, which isn't uncommon at all here,
00:37:51.000 | you can save tens of thousands of dollars over the next seven years is a
00:37:58.000 | typical period for what people kind of look at here because they figure they'll
00:38:02.000 | be moving up within seven years or paying it off.
00:38:05.000 | And you've got tens of thousands of dollars in potential savings and
00:38:12.000 | significantly greater risk unless you manage it properly.
00:38:15.000 | And the best way to manage risk on an adjustable-rate mortgage is to have a
00:38:18.000 | plan to pay the balance down as fast as possible because,
00:38:22.000 | just like with a Midwest person, the lower the principal balance when it
00:38:26.000 | begins to adjust, the lower the impact is if interest rates happen to go way up.
00:38:35.000 | I love my favorite chapter in your book is Chapter 19,
00:38:40.000 | and I'd recommend listeners buy it if for no other reason than just to get
00:38:43.000 | Chapter 19 where you talk through the money-saving strategies.
00:38:46.000 | And you walk through these scenarios step by step.
00:38:50.000 | So you talk about the holding period, just like you're doing just now.
00:38:54.000 | If you're going to hold the house for longer, do this.
00:38:56.000 | If you're going to hold the house for shorter, do this.
00:38:59.000 | You walk through the life stage and the different products and price
00:39:03.000 | recommendations for life stages, risk tolerance.
00:39:05.000 | You even have a section on if you're going to have babies, having a baby.
00:39:10.000 | If you're going to have a baby -- and here I'll read just -- this is the
00:39:13.000 | shortest one.
00:39:14.000 | But if you're going to have a baby and lose one income for a while,
00:39:17.000 | get an adjustable-rate mortgage with an initial fixed period that is longer
00:39:20.000 | than the time you want to spend at home.
00:39:22.000 | If you think you want to stay at home indefinitely, get a fixed-rate
00:39:25.000 | mortgage.
00:39:26.000 | And if you decide you want to have lots of babies, you may want to consider
00:39:30.000 | the possibility that you'll want to add on to your house in a few years.
00:39:33.000 | If this is the case, then now might be a good time for an adjustable-rate
00:39:36.000 | mortgage.
00:39:37.000 | When the time comes to build on, you're very likely to refinance again to
00:39:40.000 | pay for an addition.
00:39:42.000 | And you go on and give these examples for each one.
00:39:46.000 | In my mind, this is the whole key.
00:39:48.000 | This is a really important aspect of financial planning.
00:39:51.000 | And listeners would be well-served to pick up your book and work through
00:39:55.000 | those situations.
00:39:56.000 | Because as mortgage costs are going to be a big deal for you in the grand
00:40:03.000 | scope of your life and in your life plan, it's important to get them right.
00:40:08.000 | Well, exactly.
00:40:10.000 | And all of the elements that I discussed in Chapter 19, every one of them
00:40:16.000 | reflects a real-life client situation that I had.
00:40:21.000 | And the more somebody talks to me about, "Here's what I'm thinking about
00:40:27.000 | doing," the more we can sit down and talk about how the various options are
00:40:33.000 | going to impact them.
00:40:35.000 | A good example is somebody that wants to start a business, because that's
00:40:38.000 | really common.
00:40:40.000 | And someone that wants to start a business, for God's sake, get a fixed-rate
00:40:44.000 | mortgage and make sure you get it before you start your business.
00:40:47.000 | Because once you start your business, you will not be financiable for at
00:40:51.000 | least three years.
00:40:52.000 | So it's just little things like that.
00:40:54.000 | Talk to your mortgage advisor about your plans and make sure that they are
00:40:59.000 | part of the consideration in terms of your strategy.
00:41:02.000 | Why get a fixed-rate mortgage in that context?
00:41:05.000 | Explain that scenario.
00:41:07.000 | Well, because I guess it depends on the time frame.
00:41:11.000 | But the main reason I would say get a fixed-rate mortgage if you're about to
00:41:15.000 | start your own business is businesses, when you first start them, have a way
00:41:19.000 | of sucking up a lot of cash.
00:41:22.000 | And sometimes it takes a long time before you're actually generating any
00:41:25.000 | income.
00:41:27.000 | So your risk tolerance on a mortgage might be significantly lower if you're
00:41:33.000 | about to go into the self-employment world.
00:41:37.000 | - Yeah.
00:41:39.000 | It's amazing how no matter how hard you try to predict the future,
00:41:46.000 | things can change.
00:41:47.000 | And my final question, and I'll give you a longer intro to it,
00:41:52.000 | my final question is, do you have some strategies to create maximum
00:41:56.000 | flexibility for people and minimum cost?
00:41:59.000 | And I'll explain the scenario.
00:42:01.000 | As we record this, we're recording this on December 1, 2015.
00:42:04.000 | This will likely air either later in December or in January.
00:42:07.000 | Hopefully, by the time we record this, I will have sold the house that I bought
00:42:11.000 | a few years ago.
00:42:12.000 | But when I bought that house, I chose the house very, very carefully.
00:42:17.000 | I didn't intend to do a short-term house.
00:42:20.000 | I didn't intend to do a -- it wasn't intended to be a starter house.
00:42:24.000 | It was intended to be a long-time house.
00:42:26.000 | I didn't have any reason why I didn't expect to be in that house for 20,
00:42:30.000 | 30 years, 40 years, who knows.
00:42:33.000 | I bought a house that was big enough.
00:42:34.000 | I would be happy in it for a long time, nice enough and be happy,
00:42:37.000 | but not so big.
00:42:38.000 | Without going through the whole list, I chose the house really carefully.
00:42:42.000 | And I intended to make a -- I made a 20% down payment.
00:42:47.000 | I got a 30-year fixed-rate mortgage.
00:42:49.000 | I was intending it to be the long play.
00:42:53.000 | Well, a year after I bought the house,
00:42:56.000 | I wound up completely changing everything,
00:42:59.000 | deciding to close the business I'd been running for five or six years
00:43:02.000 | and start Radical Personal Finance, which adjusted everything.
00:43:04.000 | I had no need to live in the neighborhood where I wanted to live.
00:43:07.000 | I wanted my money back out of the house, et cetera,
00:43:09.000 | and I looked at different strategies and ultimately decided to just go ahead
00:43:11.000 | and sell the house.
00:43:13.000 | And so what was funny is I've ended up owning the house,
00:43:15.000 | and there were some timing strategies as well.
00:43:17.000 | I had some -- it's a good time to sell as far as assuming the contract goes
00:43:22.000 | through as planned.
00:43:23.000 | I'll have made a healthy profit on the house and some kind of timing the
00:43:27.000 | market a little bit to take some tax-free income as well.
00:43:29.000 | But all of my plans -- I'm glad that I had some flexibility because even
00:43:35.000 | though I had my plan set in one way, life changed.
00:43:38.000 | And I couldn't have anticipated that.
00:43:42.000 | So the question is do you have some suggestions and strategies that would
00:43:45.000 | help listeners always keep flexibility so that no matter how much they're
00:43:49.000 | planning, if their circumstances do indeed change -- they do what I did,
00:43:54.000 | they start a business, they decide to move to another state to take a better
00:43:57.000 | job, et cetera -- that they have more options?
00:43:59.000 | Any suggestions for them?
00:44:02.000 | Sure.
00:44:05.000 | One of the things that I like to do -- I work with financial planners a lot
00:44:09.000 | where we kind of partner on strategy and we sit down and kind of think about
00:44:13.000 | things.
00:44:14.000 | And financial planners that I work with tend to really like the idea of
00:44:18.000 | having an equity line, which provides a tremendous amount of flexibility.
00:44:23.000 | So it's not uncommon for us to use two different loans for financing a
00:44:29.000 | property, whether it's a refinance or a purchase, especially if there's a
00:44:36.000 | break at which your first mortgage becomes quite a bit cheaper because it's
00:44:42.000 | in a certain category, in which case we could limit that and we use the rest
00:44:46.000 | as an equity line.
00:44:48.000 | Or sometimes we just refinance your mortgage into the lowest rate possible.
00:44:52.000 | But then add an equity line on top of that.
00:44:57.000 | Because the equity line, essentially if you're not using it, doesn't cost you
00:45:01.000 | anything.
00:45:02.000 | But provides you with a great deal of flexibility.
00:45:05.000 | So I think the first thing I would say is in your situation is consider having
00:45:12.000 | two loans, which means that you've got access to cash, especially if you're
00:45:16.000 | starting a business, where you have quick access to cash.
00:45:20.000 | Another probably very important consideration would be is if you end up
00:45:25.000 | owning two homes, I'm not sure if you were going there or not, but if you end
00:45:29.000 | up owning two homes, I like diversification in my debt portfolio as much as I do
00:45:35.000 | in my investment portfolio.
00:45:37.000 | So it might be a really good idea to have one fixed loan and one variable rate
00:45:42.000 | loan so that if rates go up, you're protected on one.
00:45:45.000 | If rates go down, you get the benefit on the other.
00:45:49.000 | - That's an interesting approach.
00:45:51.000 | I hadn't considered that.
00:45:52.000 | No, I went from owning to renting.
00:45:54.000 | I was able to find a rental deal that worked.
00:45:56.000 | But that's an interesting approach to consider to diversifying that.
00:46:01.000 | Are there other approaches?
00:46:03.000 | Let's say that I were a real estate investor with a portfolio of loans.
00:46:06.000 | Are there other approaches to intelligent diversification that you would consider
00:46:09.000 | on managing rental properties?
00:46:13.000 | - Well, I do own rental properties.
00:46:20.000 | That's a good question.
00:46:22.000 | What do you have in mind?
00:46:23.000 | - I guess I'm just thinking my scenario of real estate investment is borrow a
00:46:30.000 | million dollars and let your tenants pay it off.
00:46:32.000 | So if you don't manage, however, your risks carefully on that million bucks,
00:46:37.000 | it'll sink you.
00:46:38.000 | And so as you're working into it, you've got to build safety for yourself.
00:46:42.000 | You've got to build flexibility.
00:46:44.000 | And if you're starting without a ton of money, you're going to be borrowing a
00:46:47.000 | good amount of money.
00:46:48.000 | And so you're going to be steadily managing your properties and kind of
00:46:54.000 | adjusting your financing.
00:46:55.000 | And I just was curious if you had any big picture suggestions.
00:46:59.000 | - Well, you hit the nail on the head with regards to risk.
00:47:02.000 | I mean, you have no idea with a rental property how much it's going to throw off
00:47:07.000 | every month.
00:47:09.000 | In the long run, you can make some fairly accurate projections most of the time.
00:47:13.000 | But on a month-by-month basis, you just never know.
00:47:15.000 | So an excellent strategy there is to start off with an interest-only
00:47:21.000 | adjustable-rate mortgage.
00:47:23.000 | For instance, a 711 arm that's adjustable for...or that's interest-only for 10
00:47:28.000 | years.
00:47:29.000 | And the reason that that might work is that you have the option of making a
00:47:33.000 | minimum payment for those first 10 years.
00:47:37.000 | So you save a little bit of money because it's an adjustable-rate mortgage.
00:47:42.000 | And what you do is when the property is performing well and throwing off a lot
00:47:47.000 | of cash, you use that cash to buy down the principal as fast as you can in order
00:47:52.000 | to mitigate any risk that you have once it begins to adjust.
00:47:58.000 | But then if you have a bad month, you know, the property is vacant for a month
00:48:02.000 | or requires a lot of repairs, you can make just the minimum payment,
00:48:06.000 | which is going to be only whatever interest is due for that month.
00:48:11.000 | So it's a way of reducing your cost and reducing your risk,
00:48:15.000 | or at least your monthly risk, at the same time.
00:48:20.000 | If that's your strategy, however, I certainly wouldn't finance all your
00:48:25.000 | properties using the same thing only because at some point the loans begin
00:48:33.000 | to adjust.
00:48:34.000 | And once they do begin to adjust, if the rates have gone up,
00:48:37.000 | all of a sudden what you've done is you've converted all of your debt
00:48:42.000 | into extremely expensive debt.
00:48:44.000 | Right.
00:48:45.000 | High risk.
00:48:46.000 | Well, Casey, thank you so much for sharing some of your insights and wisdom
00:48:50.000 | with the audience.
00:48:51.000 | The book is definitely a great book.
00:48:53.000 | If you're going to buy a house, I definitely recommend reading the book.
00:48:56.000 | It's called "The Loan Guide."
00:48:57.000 | I'll link to it in the blog post for today's show and in the show notes
00:49:00.000 | on your phone.
00:49:01.000 | And then you also blog and have a site at LoanGuide.com.
00:49:06.000 | Do you work with clients across -- you said you prefer to work locally.
00:49:10.000 | Do you work with clients across the country or just primarily in California?
00:49:13.000 | I work only in California.
00:49:15.000 | Licensing today is state by state, and I am only licensed in California.
00:49:21.000 | Our company is licensed in several other states as well,
00:49:24.000 | but I personally work only with California clients,
00:49:27.000 | but anywhere in California.
00:49:28.000 | I regularly finance all over the state.
00:49:31.000 | Great.
00:49:32.000 | Well, any California listeners would definitely encourage them.
00:49:34.000 | Check out LoanGuide.com, and if you're looking for a good broker, talk to Casey,
00:49:38.000 | and you can provide the same kind of personalized advice that we all wish that we had.
00:49:44.000 | Anywhere else that you want people to connect with you or any final words of advice, Casey?
00:49:48.000 | No, as far as connecting, the best way to reach me is through LoanGuide.com,
00:49:53.000 | and the final words of advice I think are don't be afraid to shop,
00:49:59.000 | don't be afraid to ask sharp questions.
00:50:03.000 | Many of the loan officers you talk to don't know any more than you do,
00:50:08.000 | so do not be intimidated by them and hold their feet to the fire.
00:50:12.000 | Sounds like the insurance industry, sounds like the investments industry.
00:50:16.000 | We're all the same.
00:50:18.000 | Yes, it does.
00:50:19.000 | All the same.
00:50:20.000 | Well, Casey, thanks for coming on the show today.
00:50:22.000 | Thanks so much for having me, Joshua.
00:50:24.000 | It was a pleasure.
00:50:26.000 | As we go today, I encourage you to check out Casey's book,
00:50:29.000 | and I encourage you to think deeply and always look for a way of optimizing your scenario.
00:50:33.000 | I don't know what's right for you.
00:50:35.000 | Every decision has pros and cons, and that's not just some random disclaimer.
00:50:39.000 | I killed all the stupid disclaimers.
00:50:41.000 | You've got to figure out your situation.
00:50:42.000 | Guess what?
00:50:43.000 | It's your money, it's your life, and you are responsible.
00:50:47.000 | You're the one who's going to sign on the dotted line,
00:50:49.000 | so do a little research before you sign
00:50:51.000 | and make sure that you have a little bit of a sense of what's going on.
00:50:57.000 | Buying a book, let's see, on Amazon right now, this book is $25.
00:51:00.000 | Paperback, shippable with Amazon Prime, $25.
00:51:05.000 | 15 used from 1881, I wouldn't bother with those.
00:51:07.000 | There's not enough of a savings there.
00:51:09.000 | But $25 might be worth investing in for an education
00:51:14.000 | that will impact the potential expenditure or savings of thousands,
00:51:18.000 | tens of thousands, or hundreds of thousands of dollars
00:51:22.000 | on the cost of your next mortgage.
00:51:24.000 | Do a little research.
00:51:26.000 | Become a person who researches things intensely.
00:51:28.000 | You can't always be successful at always making the right decision.
00:51:34.000 | We all make mistakes.
00:51:35.000 | But at least be somebody who does your best to do research.
00:51:37.000 | I encourage you to do that.
00:51:39.000 | Don't make big financial decisions without spending time
00:51:41.000 | and spending a little bit of money on your education.
00:51:44.000 | Definitely encourage you to get Jake Casey's book.
00:51:46.000 | Books are going to be the best investment you're going to make.
00:51:49.000 | $25 in, plus shipping if you don't have Amazon Prime
00:51:53.000 | or wherever you buy your books.
00:51:54.000 | $25 in and thousands of dollars of potential savings out.
00:51:58.000 | I'll take that trade any day.
00:52:01.000 | So, Casey, thanks for coming on the show.
00:52:02.000 | Thank you for listening to today's show.
00:52:04.000 | If you have enjoyed and appreciated our content,
00:52:06.000 | please consider becoming a supporter and patron of Radical Personal Finance.
00:52:10.000 | You can find all of those details at radicalpersonalfinance.com/patron,
00:52:14.000 | radicalpersonalfinance.com/patron.
00:52:16.000 | We'd be thrilled to have you there.
00:52:18.000 | Come on by and become a patron of the show so you can join our Facebook group.
00:52:21.000 | Lots of interesting conversations there happening regarding real estate,
00:52:25.000 | a lot of real estate investment discussions,
00:52:28.000 | some interesting conversations regarding GDP growth.
00:52:31.000 | So I'd encourage you to consider becoming a patron of the show
00:52:33.000 | at radicalpersonalfinance.com/patron.
00:52:36.000 | Have a great day, everybody.
00:52:37.000 | Thank you for listening.
00:52:38.000 | ♪
00:52:44.000 | Thank you.